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Property outlook

by Greg on February 18, 2016

Property outlook

The following is a guest article by Jonathan Preston.

The changing nature of financing properties, whereby it now costs more to borrow as an investor than as an owner occupier is negative for areas that were investor hotspots previously.

A prime example of this is in western Sydney, where we saw strong investment in cheaper properties in the last couple of years.

This really drove prices up, however, after APRAs last change where they asked the banks to slow investor growth down to a max of 10% annually, we saw the clearance rate in western Sydney plummet.

The question then, is how will the market look moving forward? The RBA aren’t in a hurry to cut rates further, but odds suggest a further cut is likely, however even if that does happen, it will likely not benefit investors too greatly. The good news is that it will certainly be some time before rates rise again. This is more important than further cuts in my opinion.

We have seen monetary policy be used to support growth in economies for some time now, and historically, asset prices have increased until rates are at levels that are comparable to the top of other bull markets (a bull market is where the market rises). While this is not an exact science and markets don’t normally go directly in one direction, it has been the historic trend. This would imply that properties should continue to increase in value over the coming years, until such time that rates have increased significantly, likely to at least 7% for mortgage holders.

The changing nature of mortgage pricing, where it now costs more to borrow as an investor, I believe will change the areas that are in demand. Rental yields are not increasing rapidly and lots of new properties will complete construction over the coming years, which will further reduce rental demand, and likely, prices with it.

The treasury is also said to be weighing up caps on negative gearing, and while this wouldn’t be extremely negative for most investors, it is a further concern for prices. Labor has already come out and said they will stop negative gearing on anything other than new homes if they win the election.

These factors make me believe that owner occupier style properties – i.e homes, and in expensive areas, apartments, will see the most demand in the coming years.

The problem is that yields don’t support these purchases so they are ‘luxury’ purchases really, meaning employment and wage growth will be most important.

We have also had a significant run already this cycle so I do not expect prices to continue the current trend, but I am optimistic that prices will continue to increase, just at a much more subdued pace.

It is not reasonable to expect 10%+ price growth in an annual basis as we have seen for the last few years, I do not believe even 7% is reasonable (which is where prices would double every 10 years as many say), but it is impossible to tell when price increases will actually happen, but likely in 5 years I expect higher prices than now for some of Queensland and in parts of NSW. I am not in a rush to buy in any other states currently.

Thank you for reading, please tune into the Australian Property Podcast or check my social media pages for more information.

 

Jonathan Preston

Jonathan Preston is a property investor currently holding 5 properties between Sydney and Brisbane. He is the author of ‘Australian Property Investing: 2016’ which went to #1 in the Buying and Selling Homes category on Amazon, and also hosts the Australian Property Podcast which can be found here. To find out more about Jonathan please visit his Facebook page.

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